Let’s be honest—figuring out how much money you really need to live well can feel like a bit of a guessing game. You want enough to cover the essentials, indulge in some of life’s little pleasures, and still have something left over for the future. But how much is that really? Whether you're just getting started in your career or have been at it for years, understanding your baseline income is essential. It’s not just about knowing what you *need* to survive, but what you *want* to thrive—because living well isn’t just about getting by; it’s about feeling in control of your finances and your life.

By the end of this article, you'll know exactly how much you need to cover your must-have expenses, the fun stuff that makes life enjoyable, and a little extra for your future self. So grab a cuppa, and let’s dive into the step-by-step process of figuring out your baseline income requirements.

Why Defining Your Baseline Income is Crucial

Let’s start with the big “why.” Why is it so important to know how much you need to live well? Defining your baseline income is like laying the foundation for your financial house. Without it, you’re at risk of overspending, undersaving, or simply drifting without a clear financial plan. Knowing your baseline means you can:

1. Ensure Financial Stability: You know exactly how much you need to cover your expenses, so there’s no more guesswork or scrambling at the end of the month.

2. Avoid Lifestyle Inflation: When you get a raise or a bonus, you’ll know whether to treat yourself or stash it away for your future.

3. Plan for the Future: With a clear understanding of your baseline income, you can make smarter decisions about saving, investing, and preparing for those unexpected life twists.

4. Reduce Financial Stress: When you know your numbers, you can stop worrying about how you’ll make it to the next payday and focus on the bigger picture.

Now, let’s get into the first step of defining your baseline income: understanding your cost of living. As we go through the steps make sure that you have a pen and paper in hand, or a spreadsheet if you prefer, so that you can work through your own numbers as you go along.

Step 1: Understanding Your Cost of Living

Before you can figure out how much you need to live well, you need a clear picture of your current cost of living. These are your essential expenses—the things that you absolutely cannot live without. Think of these as the foundation of your budget. Without a solid understanding of your core costs, the whole financial structure could crumble.

The Big Categories

To get started, let’s break down the major categories that make up your cost of living. These are the expenses that keep your life running smoothly month after month.

1. Housing

- Mortgage or Rent: This is likely your biggest monthly expense, and for good reason—everyone needs a roof over their head. If you’re renting, this is straightforward. If you own a home, don’t forget to include your mortgage payments, council tax, and home insurance.

- Utilities: You can’t live without electricity, water, and gas, so make sure to factor in these essential costs.

- Maintenance: Even if you rent, there will always be small repairs or upkeep to deal with. Think boiler servicing, fixing leaky taps, or gardening.

Example: Let’s say you’re renting a one-bedroom flat in London. Your rent is £1,500 per month, utilities are around £200, and you spend about £50 on maintenance. Your total housing cost is £1,750 per month.

2. Food

- Groceries: Whether you’re cooking for one or feeding a family, groceries take up a significant part of the budget.

- Eating Out: This includes everything from work lunches to the occasional takeaway. You might want to break this into day-to-day meals vs. social events (we’ll cover those in your “wants”).

Example: If you spend £300 on groceries each month and another £100 on quick lunches and dinners, your total food budget is £400 per month.

3. Day-to-Day Clothing and Personal Care

- Wardrobe Essentials: This is where you cover your daily clothing needs. Think work attire, school uniforms, or the odd pair of jeans.

- Personal Care: Haircuts, toiletries, and basic grooming are all part of this category.

Example: You budget £100 per month for clothing and accessories, plus another £50 for haircuts and grooming. That’s £150 per month.

4. Transport

- Car Payments: If you own a car, this includes your loan or lease payments.

- Insurance and Taxes: Car insurance, road tax, and MOT fees all add up.

- Fuel: Whether you drive a lot or only occasionally, fuel is a necessary cost.

- Public Transport: If you don’t drive, add up your monthly expenses for trains, buses, or the Underground.

Example: You drive to work, so you’ve got a car payment of £250, insurance at £100, fuel costs of £150, and maintenance averaging £50. That’s a total of £550 per month for transportation.

5. Healthcare

- Insurance Premiums: If you have private health insurance, make sure to include that here.

- Out-of-Pocket Expenses: This includes doctor visits, dentist appointments, and any other medical expenses not covered by the NHS.

- Prescriptions: If you take regular medication, don’t forget to budget for prescriptions.

Example: Your private health insurance premium is £150 per month, prescriptions cost £20, and other medical expenses come to around £30. Your total healthcare cost is £200 per month.

6. Minimum Debt Repayments

- Student Loans: If you have student loans, this is the minimum monthly repayment.

- Credit Cards: Any credit card debt should be included here, especially if you’re only making the minimum payments.

- Other Loans: If you have any other personal loans or finance agreements, make sure to account for them.

Example: You have a student loan repayment of £50 and £80 on credit cards. Your total debt repayment cost is £130 per month.

7. Other Essentials

- Childcare: If you have kids, childcare can be a major expense—whether it’s nursery fees, after-school clubs, or babysitters.

- Education: If you’re paying for your own courses or saving for your child’s education, include that here.

- Other Regular Expenses: This includes things like mobile phone bills, internet, and subscriptions that are essential to your day-to-day life.

Example: You spend £500 per month on childcare, £50 on mobile phone bills, and £60 on internet. That brings your total for other essentials to £610 per month.

Step 2: Calculating Your Total Monthly Needs

Now that you’ve broken down all your essential expenses, it’s time to add them up. This gives you a clear picture of how much you need just to cover the basics—your must-haves.

Example:

- Housing: £1,750

- Food: £400

- Transport: £550

- Healthcare: £200

- Debt Repayments: £130

- Other Essentials: £610

Total Monthly Needs: £3,640

So, in this example, you’d need to bring in at least £3,640 per month to cover the basics. But we’re not done yet—now it’s time to factor in the ‘wants’ that make life a little more enjoyable.

Step 3: Identifying and Adding Your ‘Wants’

Your ‘wants’ are the things that make life more enjoyable—your gym membership, that weekend away, or even your daily latte. These expenses aren’t essential for survival, but they add joy and comfort to your life. Everyone’s list of ‘wants’ is different, so be honest with yourself about what matters most to you.

The Fun Categories

Let’s break down some common ‘want’ categories to help you figure out where your money is going.

1. Entertainment

- Streaming Services: Netflix, Amazon Prime, Spotify—anything that keeps you entertained at home.

- Hobbies: This could be your gym membership, art supplies, or sports equipment.

- Events: Going to concerts, theatre shows, or football matches? Make sure to account for these outings.

Example: You spend £50 on streaming services, £40 on the gym, and £100 on event tickets each month. That’s £190 for entertainment.

2. Clothing and Personal Care (Extras)

- Wardrobe Splurges: This is where you put any “nice-to-have” clothing, like those designer shoes you’ve been eyeing.

- Spa Days or Fancy Haircuts: If you enjoy the occasional luxury spa day or visit to a high-end salon, include that here.

Example: You budget £100 per month for extra clothing and £50 for occasional spa visits. That’s £150 per month.

3. Holidays and Travel

- Weekend Getaways: Even a short break can cost a fair bit once you factor in hotels and meals.

- Annual Holiday: Whether it’s a sun-soaked beach holiday or skiing in the Alps, don’t forget to budget for your big trip.

Example: You’re saving £200 per month towards an annual holiday and spending about £100 per month on weekend trips. Total? £300 per month.

4. Dining Out and Socialising

- Restaurants and Bars: Whether it’s a night out with friends or a quiet meal with your partner, dining out is a big part of the social budget.

- Coffee and Café Stops: That daily flat white or Saturday morning brunch with friends counts here too.

- Social Events: This includes birthdays, dinner parties, or any other social gatherings you enjoy.

Example: You budget £150 per month for dining out, £50 for coffee runs, and £50 for social events. That’s £250 per month for dining and socialising.

5. Gadgets and Technology

- New Tech: Whether it’s upgrading your smartphone, getting the latest tablet, or investing in a smartwatch, tech costs can add up quickly.

- Subscriptions: Think of cloud storage, apps, or anything you pay for monthly—these small costs can sneak up on you.

- Accessories: New phone cases, headphones, or charging cables all fall into this category.

Example: You allocate £50 per month for tech upgrades and £20 for tech subscriptions. Total: £70 per month.

6. Home Décor and Furnishings

- Furniture: You may want to redecorate or finally buy that dream sofa.

- Décor: This includes artwork, cushions, and candles—anything that helps make your home feel more “you.”

- DIY and Home Projects: Whether you’re sprucing up your garden or tackling a DIY project, these costs should be factored in.

Example: You spend £80 per month on home furnishings and another £50 on DIY supplies or small improvements. That’s £130 per month.

7. Gifts and Charitable Giving

- Gifts: From birthday presents to Christmas shopping, it’s wise to budget for gifts throughout the year rather than letting them sneak up on you.

- Charity Donations: If you regularly give to causes you care about, make sure that’s accounted for here.

Example: You set aside £40 per month for gifts and £20 for charitable donations. Total? £60 per month.

8. Miscellaneous ‘Wants’

- Subscriptions and Memberships: Think of things like magazine subscriptions, subscription boxes, or even memberships to clubs and societies.

- Personal Indulgences: This could be anything that doesn’t fit into the categories above, but brings you joy—like the occasional splurge on beauty products or something special for yourself.

Example: You spend £30 per month on miscellaneous subscriptions and £20 on personal indulgences. That’s £50 per month.

Step 4: Calculating Your Total Monthly ‘Wants’

Now that you’ve identified your ‘wants,’ it’s time to add them up and see how much you’re spending each month on the extras that make life fun and fulfilling.

Example:

- Entertainment: £190

- Clothing (Extras): £150

- Holidays and Travel: £300

- Dining Out and Socialising: £250

- Gadgets and Technology: £70

- Home Décor and Furnishings: £130

- Gifts and Charitable Giving: £60

- Miscellaneous ‘Wants’: £50

Total Monthly ‘Wants’: £1,200

Step 5: Planning for Future Expenses

While your current expenses are important, don’t forget to plan for future costs. Life has a funny way of throwing surprises at us—some exciting, others less so. Preparing for both can help you avoid financial stress down the line.

Anticipated Future Expenses

1. Family Growth: If you’re planning to have children, expect higher costs for childcare, education, and healthcare.

2. Home Purchase or Upgrade: Buying a new home or renovating your current one involves significant upfront and ongoing costs.

3. Career Changes: Going back to school, starting a business, or changing careers might require additional savings.

4. Major Life Events: Weddings, anniversaries, or big birthdays often come with hefty price tags.

5. Healthcare Costs: As you age, healthcare costs may increase—especially if you’re preparing for retirement.

These future expenses may not be immediate, but you should start saving for them now to avoid feeling financially squeezed later on.

Proactive Planning

If you’re not already saving for these future expenses, now’s the time to start. Use apps or budgeting tools to set goals and track your progress. Even setting aside a small amount each month can add up over time.

Step 6: Adding It All Together—Your Baseline Income Requirement

The final step in defining your baseline income requirement is to add together your ‘needs’ and ‘wants.’ This will give you a complete picture of how much money you need to live comfortably while enjoying the things that matter most to you.

Example:

- Total Monthly Needs: £3,640

- Total Monthly Wants: £1,200

Total Baseline Income Requirement: £4,840 per month

So, in this example, you’d need to earn at least £4,840 per month to cover both your essential expenses and the things that bring you joy. This figure is what allows you to live well, with enough to handle both the necessary and the nice-to-have.

Step 7: Reviewing and Adjusting Your Baseline Income

Your baseline income is the minimum you need to live comfortably right now—but it’s not static. Life changes, and your expenses will too. You might get a raise, move to a new city, or decide to have kids. All of these changes will impact how much you need.

Here are a few things to consider:

1. Debt Repayments: Beyond minimum payments, consider adding extra to clear debts faster. This will free up more of your income in the future. 

2. Savings Goals: Your savings are just as important as your spending. You need a plan for your financial goals—whether that’s retirement, a house deposit, or a dream holiday.

3. Regular Reviews: Check your baseline every 6-12 months. You may find that your priorities have shifted, and that’s okay. The goal is to keep your budget aligned with your life.

At MoneyMagic, we always say: *Pay Yourself First*. This means setting your savings goals first, then budgeting for your wants and needs after. If you prioritise your future, you’re much more likely to reach those financial milestones you’ve been dreaming about.

Conclusion: Your Financial Foundation

Defining your baseline income is the first step in building a strong financial foundation. By understanding both your essential needs and your personal wants, you can make informed decisions that support both your current lifestyle and future goals. Remember to review your numbers regularly and adjust them as your life changes.

Now that you’ve got a clear idea of your baseline income, you can take control of your financial future. And if you’re feeling a bit lost, don’t worry—you’ve got this. Start small, make adjustments where necessary, and watch how being intentional with your income leads to greater peace of mind and financial freedom.

Next Steps:

- Plan for Inflation: Understand how inflation will affect your future income and adjust your baseline as needed.

- Set Financial Goals: Clarify what your income goals are and create a roadmap to achieve them.

- Explore Income Growth: Whether it’s negotiating a raise or finding new income streams, strategise ways to grow your earnings over time.

Now, go grab that calculator and start crunching the numbers! You’re on your way to a financial life that not only works but thrives. Happy planning!